Restatement (Second) of Contracts
§ 205 Duty of Good Faith and Fair Dealing
Summary
Section 205 imposes on every contract a duty of good faith and fair dealing in its performance and enforcement. This implied covenant prevents either party from doing anything that would destroy or injure the right of the other party to receive the benefits of the contract.
Good faith performance is not a free-standing obligation—it attaches to the exercise of rights and performance of duties under an existing contract. The concept excludes bad faith such as evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with the other party’s performance.
The duty of good faith does not create an independent cause of action separate from the underlying contract. Rather, it serves as an interpretive tool and a constraint on the exercise of discretion granted by the contract. A party who exercises contractual discretion in bad faith breaches the contract itself, not some separate duty.
Key Elements
- 1Implied in every contract as a matter of law
- 2Applies to both performance and enforcement
- 3Prohibits evasion of the spirit of the bargain
- 4Constrains exercise of contractual discretion
- 5Not a free-standing cause of action independent of the contract
Practical Application
Courts apply § 205 in cases involving insurance claim denials, franchise terminations, employment disputes, and commercial contracts where one party has discretion that could be used to undermine the other’s contractual expectations. It is particularly important in requirements and output contracts, where one party’s discretion over quantity must be exercised in good faith.
Exam Relevance
Good faith questions frequently appear in contracts exams, especially in fact patterns involving discretionary contract terms. When one party has the power to set prices, determine quality, or terminate the contract, analyze whether that discretion is being exercised in good faith under § 205. Remember that the duty supplements but does not override express terms.